There is no supply curve in monopoly-Explain.

For profit maximization, competitive and monopoly firms are same. But, still there is a difference between the two.

For a competitive firm:- P=MR=MC  

For a monopoly firm:-  P>MR=MC 

So, you see, MR & MC are equivalent for both type of firms but the relationship between Price, MC & MR differ for both.

For a competitive firm: Price = Marginal Revenue = Average Revenue = Demand = Marginal Cost.

So, you see, MR & MC are equivalent for both type of firms but the relationship between Price, MC & MR differ for both.

For a competitive firm: Price = Marginal Revenue = Average Revenue = Demand = Marginal Cost.

For a monopoly firm: Price > Marginal Revenue = Marginal Cost.

Here for a monopoly, in panel (b) the demand curve is shifted up from D1 to D2. The new Marginal Revenue curve, MR2 , intersects the Marginal Cost curve at a larger quantity Q2. But the shift in the demand curve is in a way that the price charged is the same. Shifts in demand normally cause changes in both quantity and price.

If we study the monopolist demand curve, we observed that monopoly market using the market demand curve and the firm's cost curves. However, we don't find any supply curve.

So, what exactly happened to the supply curve? Well, like any other firm, monopolist also  make decision about what quantity to supply but it doesn't have a supply curve. If we go definition, then supply curve tells us that firms choose to supply at any given price. And, it makes sense for competitive firms as they are price takers. But, a monopolist is a price-maker. So, there is no meaning to know at what price firm would sell what quantity because monopolist firm sets the price at the same time it chooses the quantity to supply.

However, the monopolist decision about what quantity to supply is difficult to separate from the demand curve it gets. Because shape of demand curve determines the shape of MR curve which determines the profit maximization of the monopolist.

That's why, monopolist has a demand curve but not a supply curve.

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Short Notes on Specialized Banks

Specialized Banks are banks which concentrate mainly on financing specialized economic and social activities. Specialized activities may be small and cottage industries financing. Financing the rural asset less and landless people etc. Follqwing banks are the Specialized Banks which operate in Bangladesh-

1. Bangladesh Krishi Bank
2. Bangladesh Samabaya Bank Ltd
3. Rajshahi Krishi Unnayan Bank (RAKUB)
4. Ansar-VDP Unnayan Bank
5. Karmashangosthan Bank
6. Probashi Kollyan Bank
7. Palli Sanchay Bank

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ব্যাস্টিক অর্থনীতি কাকে বলে?

ব্যাস্টিক অর্থনীতি মুলতঃ ব্যক্তি এবং ফার্ম এর অর্থনৈতিক আচরণ নিয়ে এবং তাদের পারস্পরিক সম্পর্ক বাজার, বিরাজমান দুস্প্র্রাপ্যতা ও সরকারি নিয়মাবলির মাধ্যমে বিশ্লেষণ করে। ব্যাস্টিক অর্থনীতি হচ্ছে অর্থনীতির একটি শাখা যা ব্যক্তি, পরিবার ও ফার্ম কিভাবে বাজারে তাদের বণ্টনকৃত সীমিত সম্পদ নিয়ে সিদ্ধান্ত গ্রহণ করে তা নিয়ে আলোচনা করে। বাজার বলতে এখানে দ্রব্য অথবা সেবাসমূহকে বোঝায় যা কেনা-বেচা করা হয়। দ্রব্য অথবা সেবাসমূহের চাহিদা ও যোগান এইসব সিদ্ধান্ত ও আচরণের উপর কী-ভাবে প্রভাব ফেলে ব্যাস্টিক অর্থনীতি তা নিরীক্ষা করে। বাজারে অবশ্যই একটি দ্রব্য বিদ্যমান থাকবে। এই তত্ত্বে প্রতিটি উপাদানকে ক্রেতা সামগ্রিক চাহিদার পরিমাণকে বিবেচনা করে এবং বিক্রেতা সামগ্রিক যোগানের পরিমাণকে বিবেচনা করে। দাম ও চাহিদার উপর ভিত্তি করে বাজার ভারসাম্যে পৌছে। বৃহৎ দৃষ্টিতে একে চাহিদা এবং যোগানের বিশ্লেষণ বলা হয়। বাজার কাঠামো যেমন পূর্ণ প্রতিযোগিতা এবং একচেটিয়া বাজার আচরণ ও অর্থনৈতিক ইফিসিয়েন্সি এর জন্য বাধাস্বরূপ।সাধারণ অণুমিত শর্ত থেকে যখন বিশ্লেষণ আরম্ভ হয় এবং বাজারের আন্যান্য আচরণ অপরিবর্তিত থাকে, তাকে আংশিক ভারসাম্য বিশ্লেষণ বলা হয়। সাধারণ ভারসাম্য তত্ত্বে বিভিন্ন বাজারের পরিবর্তন এবং সকল বাজারের সামগ্রিক পরিবর্তন এবং ভারসাম্যের বিপরীতে তাদের গতিবিধি ও আন্তঃসম্পর্ক বিবেচনা করা হয়।

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Discuss the likely effects of appreciation of taka on the country's export, import and remittance.

All of we are concerned about the recent appreciation of taka. Already different sections of business personalities and economists expressed their views and projections regarding the appreciation of taka. As usual if all other things remain constant, appreciation of a currency results in an increase in export prices and a fall in import prices. If the export items are absolutely price-elastic, then the increase in prices will discourage exports of the country and imports will become attractive.

Let us now discuss the causes and consequences of taka appreciation. The reasons behind the appreciation of the local currency are: the central bank is proudly holding a record forex reserve while there is a high volume of remittance inflow and greater exports than imports. Appreciation of a currency reflects the better economic status of a country. It is expected that the trend will continue, the provided political stalemate is solved properly. Then more foreign direct investment (FDI) will take place. The US economy is gradually improving. That means there is a growing scope of garment exports. Already a positive trend is visible, though cancellation of the Generalized System of Preferences (GSP) has created a sense of uncertainty.

The remittance inflow will remain as usual or may increase to a certain percentage. However, the Bangladeshi exporters and their importers are nervous to some extent due to this appreciation of the taka. The appreciation of taka and its immediate impact on the export market of Bangladesh are not expected to be that severe, but naturally some changes are expected. Indian exporters have expressed their satisfaction due to the rupee depreciation and textile manufacturers and exporters projected a sharp rise.

We have to note that in the event of garment exports Bangladesh gets only the labour cost. Other materials like fabrics, accessories and even packing materials are imported through back-to-back LCs while the wage board concerned is going to announce a new salary scale in the garment sector. Both the issues are going to increase the cost of production, but still the labor cost in Bangladesh's garment sector is much lower than any other competitor like China, India and Sri Lanka. So there is a less possibility of a reverse export situation.

But as usual the local exporters want an upward adjustment of taka against the US dollar for the time being against the backdrop of the falling Indian rupee, although there is a floating exchange regime in the country. It was introduced in June, 2003. Local exporters say shipments of some particular products, namely, low-end apparels, ceramics, vegetables, jute yarn and other items are being adversely affected in the global market because of the continued erosion of the value of the Indian rupee. The rupee fell to a new low against the dollar Wednesday last. But, exporters could not give details of the loss in their competitiveness following the fall of the Indian currency. Competitiveness is equally important in case of export.

Now let us see how the rupee depreciation impacts on the imports of Bangladesh. The country settles a good amount of payments for fuel imports every year. Whenever there is a rise in the world oil price, the central bank's reserve position experiences a negative trend. So, appreciation of the Taka will allow the country to save foreign currency and improve the reserve position. Bangladesh imports mostly petroleum products and oil, machinery and spare parts, soybean and palm oil, raw cotton, iron and steel automobiles and wheat. Bangladesh's main imports partners are China (17 per cent of the total), India, Indonesia, Singapore and Japan.

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Mention the objectives/ aim/ goals/ advantages of credit control

There are many objectives/ aim/ goals/ advantages of credit control. These ares-
1.    Maintain stability in the internal price level.
2.    Maintain stability in the exchange rate.
3.    Maintain stability in the money market of the economy.
4.   Eliminate or to reduce the vagaries of business cycles by controlling and regulating the supply of credit.
5.   Maximize income, employment and output in the economy.
6.  Meet financial requirements of the economy not only during normal times but also during the emergency or war.
7.    Promote economic growth.

 

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How does Bangladesh Bank control the credit? Explain

Bangladesh bank uses two ways to credit control which is Quantitative and Qualitative method. These are discussed below-

Quantitative or General Methods

(i) Bank rate policy:
Bank rate is the rate at which the central bank will rediscount bills of exchange or promissory notes and grant loans on approved securities. Bank rate is also known as discount rate. Sometimes, there may be more volume of credit in the economy. This will lead to higher prices, higher wages and unusual economic activities. Then the central bank may raise up the bank rate. With the rise in the bank rate, the market rates will also go up. This will restrict new investment or expansion or replacement. The ultimate result is that prices will fall due to reduction in the volume of credit, employment and income. The reverse will happen when bank rate is lowered.

(ii) Open market operations:
Open market operations refer to purchase and sale of securities by the central bank in the open market on its own initiative. When commercial banks possess more reserves for credit expansion purpose, the central bank will sell securities in the market. The buyers will pay the central bank with cheques drawn on their own banks. As a result the reserves of these banks will fall, and this will reduce their credit operations. Similarly, when it buys securities it will pay the sellers in cash or with cheques drawn on itself. This will increase credit expansion capacity.

(iii) Variable reserve ratio:
The central bank can control volume of credit by varying cash reserve ratio whenever necessary. If central bank raises the reserve ratio, it will lead to a reduction in the supply of credit. Similarly, by an opposite process the supply of credit may be expanded.

Qualitative or Selective Methods

(i) Rationing of credit:
Rationing of credit means that central bank puts restrictions on accommodation for credit. The credit is now rationed, and as such it will not be available as a general rule. Here central bank limits the amount of credit for each applicant.

(ii) Direct action:
Some of the commercial banks conduct their activities against the instructions as laid down by the central bank. Direct action means that central bank will penalize these banks by charging penalty rates over and above the official discount rate.

(iii) Moral suasion:
This refers to central bank's policy of persuading he commercial banks to conduct their business in a particular way.

(iv) Regulation of consumer's credit:
Consumer's credit is created through the purchase and sale of consumer's durable goods like cars, TV. etc. Their prices are repayable in installments. The central bank may impose strict terms and conditions for restricting this credit or liberalize terms and conditions for encouraging this credit.

(v) Fixation of Margin requirements:
The central bank can also control the flow of credit by varying the 'margin' on borrowing against certain types of securities which are offered by a particular class of borrowers for taking loans.

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Discuss the likely effects of appreciation of taka on the country’s export, import and remittance.

All of we are concerned about the recent appreciation of taka. Already different sections of business personalities and economists expressed their views and projections regarding the appreciation of taka. As usual if all other things remain constant, appreciation of a currency results in an increase in export prices and a fall in import prices. If the export items are absolutely price-elastic, then the increase in prices will discourage exports of the country and imports will become attractive.

Let us now discuss the causes and consequences of taka appreciation. The reasons behind the appreciation of the local currency are: the central bank is proudly holding a record forex reserve while there is a high volume of remittance inflow and greater exports than imports. Appreciation of a currency reflects the better economic status of a country. It is expected that the trend will continue, the provided political stalemate is solved properly. Then more foreign direct investment (FDI) will take place. The US economy is gradually improving. That means there is a growing scope of garment exports. Already a positive trend is visible, though cancellation of the Generalized System of Preferences (GSP) has created a sense of uncertainty. The remittance inflow will remain as usual or may increase to a certain percentage. However, the Bangladeshi exporters and their importers are nervous to some extent due to this appreciation of the taka. The appreciation of taka and its immediate impact on the export market of Bangladesh are not expected to be that severe, but naturally some changes are expected. Indian exporters have expressed their satisfaction due to the rupee depreciation and textile manufacturers and exporters projected a sharp rise. We have to note that in the event of garment exports Bangladesh gets only the labour cost.

Other materials like fabrics, accessories and even packing materials are imported through back-to-back LCs while the wage board concerned is going to announce a new salary scale in the garment sector. Both the issues are going to increase the cost of production, but still the labour cost in Bangladesh's garment sector is much lower than any other competitor like China, India and Sri Lanka. So there is a less possibility of a reverse export situation. But as usual the local exporters want an upward adjustment of taka against the US dollar for the time being against the backdrop of the falling Indian rupee, although there is a floating exchange regime in the country. It was introduced in June, 2003. Local exporters say shipments of some particular products, namely, low-end apparels, ceramics, vegetables, jute yarn and other items are being adversely affected in the global market because of the continued erosion of the value of the Indian rupee. The rupee fell to a new low against the dollar Wednesday last.

But, exporters could not give details of the loss in their competitiveness following the fall of the Indian currency. Competitiveness is equally important in case of export.

Now let us see how the rupee depreciation impacts on the imports of Bangladesh. The country settles a good amount of payments for fuel imports every year. Whenever there is a rise in the world oil price, the central bank's reserve position experiences a negative trend. So, appreciation of the Taka will allow the country to save foreign currency and improve the reserve position. Bangladesh imports mostly petroleum products and oil, machinery and spare parts, soybean and palm oil, raw cotton, iron and steel automobiles and wheat. Bangladesh's main imports partners are China (17 per cent of the total), India, Indonesia, Singapore and Japan.

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"Economics is the study of mankind in the ordinary business of life.” or Explain- "economics is a science of wealth"

Alfred Marshall provides a still widely-cited definition in his textbook Principles of Economics (1890) that extends analysis beyond wealth and from the societal to the macroeconomic level.

According to Alfred Marshall-
“Economics is a study of man's action in the ordinary business of life it inquires how he gets his income and how he uses it. It examines that part of individual and social actions which is mostly closely connected with the attainment and with the use of material requisites of well being. Thus economics is on one side a study of wealth and on the other and important side a part of the study of man ".

From the definition of economics by Alfred Marshall, we see that he lays emphasizes on the below points:

Study of an ordinary man:
According to Alfred Marshall, economics is that study of an ordinary man who lives in society. It is not concerned with the lives of only rich persons or who is cut away from the society. Its subject matter is a particular aspect of human behaviour i.e. earning and spending of incomes for the normal material needs of human beings.

Economics is not a useless study of wealth:
Economics does not regard wealth as the be-all and end-all of economics activities wealth is not of primary importance. It is earned only for promoting human welfare economics is studied to analyze the causes of material prosperity of individuals and nations.

Economics is a social science:
It does not study the behaviour of isolated individuals but the actions of persons living in society. When people live together they interact and cooperate to work at firms, factories, shop and offices to produce and exchange goods or services. The problems about these activities are studied in economics.

Study of material welfare:
According to Alfred Marshall, economics studies only material requisites of well being or causes of material welfare. It is cleared from this definition that it is materialistic aspect and ignores non-material aspects. Alfred Marshall stressed that the man’s behaviour and activities to produce and consume maximum number of goods and services are the main object of study wealth is not an end or final aim, but only a means to achieve a higher objective of welfare.

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Explain the relationship of economics with a) Statistics b) Sociology c) Political Science

There exist a close relationship of economics with Statistics, Sociology and Political Science these are given bellow.

Statistics:
Economics can be defined as the study in which the tools of economic theory, statistical inference and mathematics are systematically applied, using observed data, to the analysis of economic laws. It is therefore concerned with the "empirical determination of economic laws. Economic theories are written in mathematical form and are then analyzed using statistical methods. If the observed data are found to be incompatible with the predictions of the theory, it is rejected. Theories are accepted if the data are found to fit the theory."Econometrics is a branch of economics that applies statistical methods to the empirical study of economic theories and relationships. It is as a form of mathematical economics. Economists base most theories and policies on statistics stats are a vital part of economics. Economics study trends and patterns based on stats used in economics: mean f tests, t tests, and regressions, confidence intervals stats are used to measure growth rates, inflation, and any relationship between two variables (regressions)

Sociology:
Sociology and Economics as social sciences have close relations. Relationship between the two is so close that one is often treated as the branch of the other, because society is greatly influenced by economic factors, and economic processes are largely determined by the environment of the society. Economics deals with the economic activities of man. It deals with production, consumption and distribution of wealth. The economic factors play a vital role in the very aspect of our social life. Total development of individual depends very much on economic factors. Without economic conditions, the study of society is quite impossible. All the social problems are directly connected with the economic conditions of the people.

In the same way Economics is influenced by Sociology. Without the social background the study of Economics is quite impossible. Sociologists have contributed to the study of different aspects of economic organization. Property system, division of labour, occupations etc. are provided by a sociologist to an economist.

Political Science:
The link between economics and political science is economic policy. These are rules, or regulation, or policies that politicians make concerning the economy. Economic policy is a vast area that range from minimum wage to taxation to banking regulations. They have both political and economic consequences. A large portion of politics is about how government can influence the economy. The study of these economic effects relate to political science.

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What are the ways to remove unemployment?

Ways and means to remove unemployment in Society of Bangladesh removal of unemployment is the responsibility of the state. The Constitutional of Bangladesh has the “Directive Principles” of the State and enjoined this duty on the State Government. In Society we have already seen that there is a good deal of unemployment. This removal of unemployment is necessary for the prosperity of the nation. For this, the following steps have to be taken:

1) Improvement in the agricultural system:
We have already seen that the agricultural system in Bangladesh is backward and underdeveloped. This backwardness is responsible for a lot of unemployment. If the unemployment has to removed, the system of agriculture has to be modernized and improved, for this the following steps to be taken:

a) Holding should be consolidated and made economic.
b) Methods of agriculture should be improved and as far as possible farmers should be freed from dependence on nature.
c) System of crops should be planned scientifically and improved. If more crops earned they would provide more employment.
d) The farmers should be provided with good seed, good fertilizer, healthy animals, modern implements and tools etc.

2) Adequate arrangement of facilities of irrigation:
In villages the agriculture very much depends on nature. If rains fail, the crops are destroyed. This brings about a good deal of unemployment. Methods of irrigation should be made more modern. They should also be adequate so that it may be possible for people to water their fields.

3) Increasing the area of cultivable land:
To day in the villages there is a great pressure on land. The area under cultivation is not sufficient to provide food to all the people of this country. Barren land should be broken and made fertile. Other methods should also be made for improving the area of cultivable land which is not normally fit for agriculture, also be improved and made fit. This would remove unemployment in the villages.

4) Setting up and develop the cottage and village industries:
In village, people have seasonal employment in agriculture. Apart from it all the persons do not have avenues for the employment. What is needed is to set up of industries so that those who do not have land are employed in it. Apart from it, the agriculturalists during dull season should get employment in these industries. Women and land less laborers shall also be able to get employment if industries are set up.

5) Improving the means of transport and communication:
In villages there is need to have proper roads and places where offices and stores for seeds etc, may be set up. Public construction should be undertaken in the villages to provide employment to the idle hands. This would improve the employment position in the village. Apart from it, it would also add to the prosperity of the villages.

6) Construction of public Transports, Roads etc:
It is necessary to improve the means of transport and communication. This would have two fold advantages. Firstly, the village people shall be able to send their products to markets for sale and secondly, they shall also be able to go to such other places where they can get employment. Apart from it, this would also provide employment to many persons who shall engage themselves in the task of transporting these people.

7) Organization of the agricultural market:
There is need to organize markets for the agricultural product. At present, there is dearth of such market. This situation creates difficulties for the agriculturalists. On the one hand, they are not able to get proper price and on the other hand they have to suffer from other handicaps. If markets are organized, they would provide employment to certain hands and also help the agriculturalists to get proper price for their labor.

In fact Bangladesh is such a vast country and unemployment is so large that “Herculean” efforts shall have to be made to surmount this degree. Various economists and social thinkers have suggested various ways for it. Many of these ways have also been incorporated in the Five Year Plans. In spite of these Five Year Plans employment position is far from satisfactory.

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What are the types of Unemployment?

1) Structural unemployment:
Basically Bangladesh's unemployment is structural in nature. It is associated with the inadequacy of productive capacity to create enough jobs for all those able and willing to work. In Bangladesh not only the productive capacity much below the needed quantity, it is also found increasing at a slow rate. As against this, addition to labour force is being made at a first rate on account of the rapidly growing population. Thus, while new productive jobs are on the increase, the rate of increasing being low the absolute number of unemployed persons is rising from year to year.

2) Disguised unemployment:
Disguised unemployment implies that many workers are engaged in productive work. For example, in Indian villages, where most of unemployment exists in this form, people are found to be apparently engaged in agricultural works. But such employment is mostly a work sharing device i.e., the existing work is shared by the large number of workers. In such a situation, even if many workers are withdrawn, the same work will continue to be done by fewer people. It follows that all the workers are not needed to maintain the existing level of production. The contribution of such workers to production is nothing. It is found that the very large numbers of workers on Indian farms actually hinder agricultural works and thereby reduce production.

3) Cyclical unemployment:
Cyclical unemployment in caused by the trade or business cycles. It results from the profits and loss and fluctuations in the deficiency of effective demand production is slowed down and there is a general state of depression which causes unemployment periods of cyclical unemployment is longer and it generally affects all industries to a greater or smaller extent.

4) Seasonal unemployment:
Seasonal unemployment occurs at certain seasons of the year. It is a widespread phenomenon of Indian villages basically associated with agriculture. Since agricultural work depends upon Nature, therefore, in a certain period of the year there is heavy work, while in the rest, the work is lean. For example, in the sowing and harvesting period, the agriculturists may to engage themselves day and night. But the period between the post-harvest and pre sowing is almost workless, rendering many without work. Thus, seasonal unemployment is largely visible after the end of agricultural works.

5) Underemployment:
Underemployment usually refers to that state in which the self-employed working people are not working according to their capacity. For example, a diploma holder in engineering, if for wants of an appropriate job, start any business may be said to be underemployed. Apparently, he may be deemed as working and earning in a productive activity and in this sense contributing something to production. But in reality he is not working to his capability, or to his full capacity. He is, therefore, not full employed. This type of unemployment is mostly visible in urban areas.

6) Open Unemployment:
Open unemployment is a condition in which people have no work to do. They are able to work and are also willing to work but there is no work for them. They are found partly in villages, but very largely in cities. Most of them come from villages in search of jobs, many originate in cities themselves. Such employment can be seen and counted in terms of the number of such persons. Hence it is called upon unemployment. Open unemployment is to be distinguished from disguised unemployment and underemployment in that while in the case of former unemployment workers are totally idle, but in the latter two types of unemployment they appear to be working and do not seem to be away their time.

7) Voluntary Unemployment:
Voluntary unemployment occurs when a working persons willingly withdraws himself from work. This type of unemployment may be caused due to a number of reasons. For example, one may quarrel with the employer and resign or one may have permanent source of unearned income, absentee workers, and strikers and so on. In voluntary unemployment, a person is out of job of his own desire. She does not work on the prevalent or prescribed wages. Either he wants higher wages or does not want to work at all.

8) Involuntary unemployment:
Involuntary unemployment occurs when at a particular time the number of worker is more than the number of jobs. Obviously this state of affairs arises because of the insufficiency or non-availability of work. It is customary to characterize involuntary unemployment, not voluntary as unemployment proper.

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What is Budget Deficit? Discuss the Methods of financing a budget deficit.

Meaning of Budget Deficit:
Budget deficit is a status of financial health in which expenditures exceed revenue. The term "budget deficit" is most commonly used to refer to govt. spending rather than business or individual spending. When referring to accrued federal govt. deficits, the term "national debt” is used. The opposite of a budget deficit is a budget surplus, & when inflows = outflows, the budget is said to be balanced.

Methods of financing a budget deficit:

(i) Borrowing from the private sector - This refers to the govt. borrowing funds from the private sector. Under this system, the Treasury issues securities & govt. bonds to investors. These govt bonds are marketed through the tender system (a type of auction) & are bought in lots of $100000. They are sold to institutions that offer to buy them at lowest interest rate. The key advantage of this method is that the govt. can always be certain of fully financing the deficit.

(ii) Monetary financing (borrowing from the Reserve Bank) - This is also referred to as 'monetizing the deficit' and involves the govt. borrowing directly from the RB rather than private investors. This method is not preferred as it amounts to printing money in order to finance the deficit. This results in an increase in money supply and therefore inflationary pressures.
(iii) Overseas financing - To finance its deficit, the govt. may borrow money from overseas lenders. Although it has the benefit of avoiding the crowding out effect, it has not been used since the 1980s because it adds to foreign debt.

(iv) Selling Assets - Another alternative to financing part of the deficit is selling government assets such as shares in Government enterprises. The sale of assets can create a headline budget surplus however it is not sustainable as it can only be used on a ‘one off’ basis. Although this form of financing a budget deficit may reduce the crowding out effect, it is important to note that the demand for funds from the domestic savings pool may remain the same as borrowing from the private sector. Instead of the govt. borrowing funds, the asset purchasers need to borrow the funds to finance the asset purchase.

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Discuss the objectives of monetary policy in a developing economy.

1. ECONOMIC GROWTH: By adopting suitable monetary policy, a government tries to achieve economic development. As a result of economic development , there will be proper utilization of natural & human resources, more capital formation, more employment , increase in national & per capita income, increase in income along with an increase in the standard of living.

2. EXCHANGE STABILITY: The traditional objective of monetary policy has been the achievement of stable exchange rates. Balance of payment creates fluctuation in the foreign exchange rates. The exchange rates, therefore, has to be adjusted to achieve the favorable balance of payments.

3. PRICE STABLITY: Stable prices improve public confidence, promote business activity & ensure equal distribution of income & wealth. As a result, it will enhance the prosperity and welfare in the community. But a determination of a satisfactory price level is a difficult task.

4. FULL EMPLOYMENT: To attain this objective, it is necessary to increase production and demand. During the boom period the position is automatically achieved as there is rapid increase in demand and thereby production is also increased. On the contrary, during depression there is low production because of low demand and wide unemployment. Hence, the objective of monetary policy is to check rising unemployment during depression period.

5. CREDIT CONTROL: To control credit government uses the tools like; Bank Rate Policy, Open Market Operation, Statutory Liquidity Ratio (SLR) & Cash Reserve Ratio (CRR).

6. REDUCTION IN EQUALITY & WEALTH: Inequality in income and wealth due to right of private property and law of inheritance is the common feature of capitalist and mixed economy. As a result, the society is divided into two classes, rich and poor. Poor class is generally exploited by rich class. The objective of monetary policy is to reduce the inequalities of income and wealth.

7. CREATION & EXPANSION OF FINANCIAL INSTITUTION: A major objective of monetary policy in a developing country is to speed up the process of economic development by improving the currency to provide large credit facilities and to mobilize savings for productive purposes. The monetary authority can help in establishment and expansion of banks and institutions in urban and rural areas.

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Demand curve is negatively (Left to Right) sloped. Why?

The demand curve generally slopes downward from left to right. It has a negative slope because the 2 important variables price & quantity work in opposite direction. As the price of a commodity decreases, the quantity demanded increases over a specified period of time & vice versa, other things remaining constant. The reasons for demand curve to slope downward r as follows:

(i) Law of diminishing marginal utility: The law of demand is based on the law of diminishing marginal utility. According to the cardinal utility approach, when a consumer purchases more units of a commodity, its marginal utility declines. The consumer, therefore, will purchase more units of that commodity only if its price falls. Thus, a decrease in price brings about an increase in demand. The demand curve, therefore, is downward sloping.

(ii) Income effect: Other things being equal, when the price of a commodity decreases, the real income or the purchasing power of the household increases. The consumer is now in a position to purchase more commodities with the same income. The demand for a commodity thus increases not only from the existing buyers but also from the new buyers who were earlier unable to purchase at higher price. When at a lower price, there is a greater demand for a commodity by the households„ the demand curve is bound to slope downward from left to right.

(iii) Substitution effect: Let the Price of meat falls & the prices of other substitutes say poultry remain constant. Then the households would prefer to purchase meat because it is now relatively cheaper. The increase in demand with a fall in the price of meat will move the demand curve downward from left to right.

(iv) Entry of new buyers: When the price of a commodity falls, its demand not only increases from old buyers but the new buyers also enter the market. The combined result of the income & substitution effect is that demand extends, ceteris paribus, as the price falls. The demand curve slopes downward from left to right.

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Fisher's quantity theory of money

The quantity theory of money states that the quantity of money is the main determinant of the price level or the value of money. Any change in the quantity of money produces an exactly proportionate change in the price level.

In the words of Irving Fisher, “Other things remaining unchanged, as the quantity of money in circulation increases, the price level also increases in direct proportion and the value of money decreases and vice versa.” If the quantity of money is doubled, the price level will also double and the value of money will be one half. On the other hand, if the quantity of money is reduced by one half, the price level will also be reduced by one half and the value of money will be twice.

Fisher has explained his theory in terms of his equation of exchange:

PT=MV+ M’ V’

Where P = price level, or 1 IP = the value of money;

M = the total quantity of legal tender money;

V = the velocity of circulation of M;

M’ – the total quantity of credit money;

V’ = the velocity of circulation of M;

T = the total amount of goods and services exchanged for money or transactions performed by money.

This equation equates the demand for money (PT) to supply of money (MV=M’V). The total volume of transactions multiplied by the price level (PT) represents the demand for money.

According to Fisher, PT is SPQ. In other words, price level (P) multiplied by quantity bought (Q) by the community (S) gives the total demand for money. This equals the total supply of money in the community consisting of the quantity of actual money M and its velocity of circulation V plus the total quantity of credit money M’ and its velocity of circulation V’. Thus the total value of purchases (PT) in a year is measured by MV+M’V’. Thus the equation of exchange is PT=MV+M’V’. In order to find out the effect of the quantity of money on the price level or the value of money, we write the equation as

PT= MV+M’V’

Fisher points out the price level (P) (M+M’) provided the volume of tra remain unchanged. The truth of this proposition is evident from the fact that if M and M’ are doubled, while V, V and T remain constant, P is also doubled, but the value of money (1/P) is reduced to half.

Fisher’s quantity theory of money is explained with the help of Figure 65.1. (A) and (B). Panel A of the figure shows the effect of changes in the quantity of money on the price level. To begin with, when the quantity of money is M, the price level is P.

When the quantity of money is doubled to M₂, the price level is also doubled to P₂. Further, when the quantity of money is increased four-fold to M₄, the price level also increases by four times to P₄. This relationship is expressed by the curve P = f (M) from the origin at 45°.

In panel Вof the figure, the inverse relation between the quantity of money and the value of money is depicted where the value of money is taken on the vertical axis. When the quantity of money is M₁ the value of money is HP. But with the doubling of the quantity of money to M₂, the value of money becomes one-half of what it was before, 1/P₂. And with the quantity of money increasing by four-fold to M₄, the value of money is reduced by 1/P₄. This inverse relationship between the quantity of money and the value of money is shown by downward sloping curve 1/P = f (M).

Assumptions of the Theory:

Fisher’s theory is based on the following assumptions:

1. P is passive factor in the equation of exchange which is affected by the other factors.

2. The proportion of M’ to M remains constant.

3. V and V are assumed to be constant and are independent of changes in M and M’.

4. T also remains constant and is independent of other factors such as M, M, V and V.

5. It is assumed that the demand for money is proportional to the value of transactions.

6. The supply of money is assumed as an exogenously determined constant.

7. The theory is applicable in the long run.

8. It is based on the assumption of the existence of full employment in the economy.

Criticisms of the Theory:

The Fisherian quantity theory has been subjected to severe criticisms by economists.

1. Truism:

According to Keynes, “The quantity theory of money is a truism.” Fisher’s equation of exchange is a simple truism because it states that the total quantity of money (MV+M’V’) paid for goods and services must equal their value (PT). But it cannot be accepted today that a certain percentage change in the quantity of money leads to the same percentage change in the price level.

2. Other things not equal:

The direct and proportionate relation between quantity of money and price level in Fisher’s equation is based on the assumption that “other things remain unchanged”. But in real life, V, V and T are not constant. Moreover, they are not independent of M, M’ and P. Rather, all elements in Fisher’s equation are interrelated and interdependent. For instance, a change in M may cause a change in V.

Consequently, the price level may change more in proportion to a change in the quantity of money. Similarly, a change in P may cause a change in M. Rise in the price level may necessitate the issue of more money. Moreover, the volume of transactions T is also affected by changes in P. When prices rise or fall, the volume of business transactions also rises or falls. Further, the assumptions that the proportion M’ to M is constant, has not been borne out by facts. Not only this, M and M’ are not independent of T. An increase in the volume of business transactions requires an increase in the supply of money (M and M’).

3. Constants Relate to Different Time:

Prof. Halm criticises Fisher for multiplying M and V because M relates to a point of time and V to a period of time. The former is a static concept and the latter a dynamic. It is therefore, technically inconsistent to multiply two non-comparable factors.

4. Fails to Measure Value of Money:

Fisher’s equation does not measure the purchasing power of money but only cash transactions, that is, the volume of business transactions of all kinds or what Fisher calls the volume of trade in the community during a year. But the purchasing power of money (or value of money) relates to transactions for the purchase of goods and services for consumption. Thus the quantity theory fails to measure the value of money.

5. Weak Theory:

According to Crowther, the quantity theory is weak in many respects. First, it cannot explain ’why’ there are fluctuations in the price level in the short run. Second, it gives undue importance to the price level as if changes in prices were the most critical and important phenomenon of the economic system. Third, it places a misleading emphasis on the quantity of money as the principal cause of changes in the price level during the trade cycle.

6. Neglects Interest Rate:

One of the main weaknesses of Fisher’s quantity theory of money is that it neglects the role of the rate of interest as one of the causative factors between money and prices. Fisher’s equation of exchange is related to an equilibrium situation in which rate of interest is independent of the quantity of money.

7. Unrealistic Assumptions:

Keynes in his General Theory severely criticised the Fisherian quantity theory of money for its unrealistic assumptions. First, the quantity theory of money for its unrealistic assumptions. First, the quantity theory of money is unrealistic because it analyses the relation between M and P in the long run. Thus it neglects the short run factors which influence this relationship. Second, Fisher’s equation holds good under the assumption of full employment. But Keynes regards full employment as a special situation. The general situation is one of the under-employment equilibrium. Third, Keynes does not believe that the relationship between the quantity of money and the price level is direct and proportional.

8. V not Constant:

Further, Keynes pointed out that when there is underemployment equilibrium, the velocity of circulation of money V is highly unstable and would change with changes in the stock of money or money income. Thus it was unrealistic for Fisher to assume V to be constant and independent of M.

9. Neglects Store of Value Function:

Another weakness of the quantity theory of money is that it concentrates on the supply of money and assumes the demand for money to be constant. In order words, it neglects the store-of-value function of money and considers only the medium-of-exchange function of money. Thus the theory is one-sided.

10. Neglects Real Balance Effect:

Don Patinkin has criticized Fisher for failure to make use of the real balance effect, that is, the real value of cash balances. A fall in the price level raises the real value of cash balances which leads to increased spending and hence to rise in income, output and employment in the economy. 11. Static:

Fisher’s theory is static in nature because of its unrealistic assumptions as long run, full employment, etc. It is, therefore, not applicable to a modern dynamic economy.

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Methods of Demand forecasting for a product

There are several methods to predict the future demand. All methods can be broadly classified into two. (A) Survey methods, (B) Statistical methods

(A) Survey methods

Under this method surveys are conducted to collect information about the future purchase plans of potential consumers. Survey methods help in obtaining information about the desires, likes and dislikes of consumers through collecting the opinion of experts or by interviewing the consumers.

Survey methods are used for short term forecasting. Important survey methods are-

(a) Consumers interview method,

(b) Collective opinion or sales force opinion method

c) Experts opinion method,

(d) Consumers clinic and

(f) End use method.

(B) Statistical Methods

Statistical methods use the past data as a guide for knowing the level of future demand. Statistical methods are generally used for long run forecasting. These methods are used for established products.

Statistical methods include:

(i) Trend projection method,

(ii) Regression and Correlation,

(iii) Extrapolation method,

(iv) Simultaneous equation method, and

(v) Barometric method.

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